You’re over 62 years old, you own your home and you need cash. What can you do? Depending on your circumstances, a reverse mortgage might be an option worth exploring. Reverse mortgages aren’t like typical mortgages. Instead of paying the lender every month, you have a few options including the lender paying you or a line of credit you can access. You get to remain in your home and don’t have to make payments on the mortgage until the last borrower passes away. Although a reverse mortgage can seem like an ideal way to increase your cash flow during retirement, there are a few things to think about before you apply for one.
Benefits
When you apply for a reverse mortgage, you are turning some of your home’s equity into cash. Unlike a home equity loans reverse mortgages don’t require you to make a payment unless you end up moving out of the home or selling it. If you die, your heirs can either pay off the loan with proceeds from your estate or sell the home to pay off the mortgage. The money you receive from a reverse mortgage is usually not taxed and won’t affect any Social Security benefits you receive. You still have the option of receiving the money in one lump sum or as monthly payments.
Risk or Drawbacks
Think reverse mortgages seem too good to be true? Keep in mind that there are several very real risks involved when taking on a reverse mortgage. For one thing, reverse mortgages aren’t free. Like a standard mortgage, interest is part of the deal. According to the Federal Trade Commission, the interest on a mortgage compounds over time—so the amount you owe can climb considerably, based on the rate. You can’t deduct the interest on a reverse mortgage from your income until you start to pay off the loan. Like traditional mortgages, most types of reverse mortgages also charge origination and servicing fees, as well as closing costs.
Taking out a reverse mortgage can also affect what you’re able to leave to your heirs. Although many loans have clauses that prevent your heirs from having to pay more than the total equity in the home once the mortgage is due, it is possible for them to have to sell the home to pay off the loan—meaning you won’t be able to pass your home down to your children.
Types of Mortgage
A reverse mortgage can be offered by a government agency or a private lender. The FHA offers the Home Equity Conversion Mortgage (HECM). The HECM is available to people over the age of 62 who either own their homes outright or owe a balance on the mortgage that is small enough to be paid off with proceeds from the HECM. Another option is a single-purpose reverse mortgage, which might be offered by a state government or by a nonprofit. With a single-purpose loan, you can only use the money for one set reason, such as to make repairs on your home or to pay your taxes. A third type of reverse mortgage is a jumbo or proprietary mortgage. Jumbo or propriety mortgages are available from private lenders and designed for homes worth more than $625,000.
A reverse mortgage counseling session can help you decide if a reverse mortgage is right for you. In fact, counseling is required if you are considering a HECM. Counseling gives you a chance to learn more about reverse mortgages and weigh the pros and cons of getting one—check it out today!
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